MetroCat Re completes at $200m. MTA pleased, but may have liked more

The MetroCat Re Ltd. (Series 2013-1) catastrophe bond, which is the first cat bond in the markets history to bring storm surge risk alone in a transaction to insurance-linked securities investors, has completed successfully at $200m, received its final rating and the notes and program have listed in Bermuda.

The successful completion of the cat bond gives First Mutual Transportation Assurance Co. (FMTAC), a New York State-licensed captive insurer and subsidiary of the New York Metropolitan Transportation Authority (MTA), a fully-collateralized source of multi-year reinsurance protection for storm surge risks.

The per-occurrence reinsurance protection that MetroCat Re provides for storm surge risks is based on a parametric trigger, with trigger events linked to actual surge heights during named storms as measured by tidal gauges in key locations around New York and Manhattan.

The transaction was reportedly well-received by investors in the ILS market, the cat bond upsized by 60% up from $125m to offer the MTA $200m of coverage. At the same time the pricing on the deal dropped as investors accepted the risk for less than it was originally marketed at, typically a sign of strong investor demand, with the coupon dropping from the initial price guidance of 5% to 5.5% above the return of the collateral assets to finish with a coupon of 4.5%, a drop of 14% from the mid-point of the original guidance.

So the MTA will surely be pleased with its first trip to the catastrophe bond market, successfully securing $200m of storm surge cover at what appears to be very attractive pricing for the risk profile of the deal? Judging from comments the MTA made in a press release today it is delighted with the success of its first alternative reinsurance transaction in the form of a cat bond.

“In the aftermath of Superstorm Sandy, the traditional avenues we use for insurance and reinsurance contracted dramatically, making it exceedingly difficult for the MTA to obtain insurance,” commented MTA Chairman and CEO Thomas F. Prendergast. “But as a result of this savvy and novel reinsurance arrangement, we are now in a stronger position should our area, God forbid, face another large-scale storm-surge event within the next three years.”

“This terrific outcome was the result of the creative thinking and hard work of MTA’s finance, strategic initiatives and insurance staff as well as the willingness of our Board to explore new risk transfer alternatives,” Prendergast added. “It will substantially increase our coverage for property damage from storm surge for three years at a favorable price. This transaction also strengthens our position with regard to future interactions with the traditional reinsurance market. We anticipate that this deal represents the start of a long-term alternative reinsurance option that diversifies MTA’s risk management strategy.”

It appears from these comments that the MTA is pleased with the results of the MetroCat Re deal, but it transpires that the MTA was actually in need of $300m of cover just to bring it back to the levels of reinsurance it had in place in 2012, before Sandy struck.

According to recent board meeting documents from the MTA, the reinsurance renewals in 2013 had left it $300m short of cover compared to 2012. This was due to a decline in reinsurers appetite for storm risk in New York after super storm Sandy’s impact. FMTAC only secured $500m of cover from traditional reinsurers, leaving it to search for $300m from capital market reinsurance alternatives, according to the documents.

The MTA board document says:

For the policy year 2013-2014 (which commenced May 1, 2013), FMTAC obtained $500 million of property reinsurance coverage from conventional reinsurers in the global reinsurance marketplace. This was $300 million less in coverage for catastrophic perils like floods than was obtained in policy year 2012-2013, reflecting the reduced capacity following Sandy offered to FMTAC by many of the companies that had traditionally provided reinsurance to MTA’s All-Agency Property Program. Access to an additional $300 million in coverage, not currently available from conventional reinsurers at competitive prices, may be available through a capital market-based reinsurance program. MTA will continue to evaluate reinsurance options for obtaining such additional coverage.

So the MTA failed to secure the full $300m from the catastrophe bond market though this MetroCat Re deal. However it may have secured the additional $100m elsewhere, perhaps on a fully-collateralized basis from similar, alternative or non-traditional sources of reinsurance capital. It’s also possible that the MTA may have been advised to start smaller in the cat bond market, for fear of putting off investors or putting all it’s protection in one place.

At this time we cannot confirm whether the MTA has secured this extra $100m of protection or whether its reinsurance program is $100m smaller than before Sandy. It is likely that having MetroCat Re in place for three years will make the MTA’s negotiations with traditional reinsurers easier at renewals to come. The MTA also noted that the premium cost to complete MetroCat Re was “Well below quotes that MTA received this spring for traditional property coverage”, suggesting that the deal has offered it a good saving on coverage.

Standard & Poor’s said that it assigned a rating of ‘BB-(sf)’, to the $200 million, Series 2013-1 class A notes issued by MetroCat Re Ltd. S&P noted that this is the first time it has rated a cat bond deal using only Risk Management Solutions Inc.’s storm-surge model, as well as the first time it has rated a transaction that has storm surge as the sole metric for determining if a triggering event has occurred.

S&P also said:

The rating is based on the lower of the rating on the catastrophe risk (‘BB-‘) and the rating on the assets in the collateral accounts (‘AAAm’ on the closing date and rated by Standard & Poor’s thereafter). We do not maintain an interactive rating on the ceding insurer, First Mutual Transportation Assurance Co. (FMTAC). However, credit exposure to FMTAC will be mitigated because FMTAC will prepay the initial quarterly interest spread at closing and will prepay each subsequent quarterly interest spread 50 days before each payment date.

FMTAC was incorporated under New York State laws as a pure captive insurance company on Dec. 5, 1997, and commenced operations on that date. The company is a wholly owned subsidiary of the Metropolitan Transportation Authority (MTA) and is established to insure and reinsure the risks of the MTA.

The class notes provide reinsurance to FMTAC for named storms that generate an event index value that equals or exceeds 8.5 feet for Area A (tidal gauges located in The Battery, Sandy Hook, and Rockaway Inlet) or 15.5 feet for Area B (tidal gauges in East Creek and Kings Point).

A loss payment on the notes is based on the event index value meeting or exceeding a trigger level for the applicable area. If a trigger event occurs, the loss payment from MetroCat to FMTAC will be 100% of the outstanding principal amount.

The MetroCat Re Ltd. variable rate note program and the singe $200m tranche of Series 2013-1 notes have been admitted for listing on the Bermuda Stock Exchange (BSX) with Appleby Securities (Bermuda) Limited acting as listing sponsor.

So that’s it for the first storm surge catastrophe bond to hit the ILS market, a successful transaction well received by the investor base. Perhaps not meeting the MTA’s initial coverage expectations but at $200m it is still a sizeable chunk of its reinsurance program. It will be interesting to watch this cat bond as the hurricane season progresses, particularly its pricing in the secondary market should any storms head for New York. It will also be interesting to see whether anyone tries to emulate it and issue a storm surge cat bond themselves, perhaps for a different region.

You can read all about the first storm surge cat bond, MetroCat Re Ltd. (Series 2013-1), in our catastrophe bond and ILS Deal Directory.